China ready to end Dollar Peg!

The head of China’s central bank has given the strongest signal yet that the
country will move away from pegging its currency to the dollar, but he said
any changes would be gradual.

By Garry White
Published: 5:31PM GMT 06 Mar 2010

Zhou Xiaochuan, governor of the People's Bank of ChinaPhoto: AP

At the annual session of the legislative National People’s Congress in
Beijing, Zhou Xiaochuan, governor of the People’s Bank of China, said that
the days of the “special yuan” policy were numbered. He described the dollar
peg as a “temporary” response to the global financial crisis, but gave no
timescale for any change in policy. The currency has been pegged at about
6.83 yuan per dollar since July 2008.

Many economists expect China to allow the yuan to appreciate slightly this
year, but the cautious tone by Mr Zhou means that any change may not happen
for some time. He said that the central bank would maintain the “basic
stability” of the currency. So, despite the fact that the Chinese economy
grew by 10.7pc in the fourth quarter of last year, the country’s loose
monetary policy looks set to continue.

“If we are to exit from irregular policies and return to ordinary economic
policies, we must be extremely prudent about our choice of timing,” Mr Zhou
said. “This also includes the [yuan] exchange rate policy.”

China’s currency policy has been subject of fierce debate, particularly in the
US and Europe, with the country’s central bank accused of keeping the yuan
artificially low to promote a domestic exports boom. An artificially lower
currency makes the country’s goods and services more competitive, leaving
other exporters at a disadvantage. Jim O’Neil, Goldman Sach’s chief
economist, thinks the Chinese should allow their currency to appreciate by
as much as 5pc.

In recent week President Obama has been vocal on the issue of the artificially
low currency. “China and its currency policies are impeding the rebalancing
[of the global economy] that’s necessary,” Mr Obama told Bloomberg last
month. “My goal over the course of the next year is for China to recognize
that it is also in their interest to allow their currency to appreciate
because, frankly, they have got a potentially overheating economy.”

The relative value of the dollar is important to China, as the country is the
world’s largest holder of US government debt. According to data form the US
Treasury Department, China held $894.8bn (£591bn) of US Treasury securities
at the end of December. Roughly two-thirds of the country’s reserves are
believed to be in dollars and dollar-denominated assets such as gold.

“The US dollar is still an extremely important currency, playing a key role in
international trade, cross-border capital flows, direct investment as well
as in determining whether we can smoothly overcome the global financial
crisis,” Mr Zhou said.

When China eventually abandons the peg, the country will have to manage its
exit strategy carefully. If the central bank allows a gradual appreciation
of its currency, which would be the best strategy for its exporters, there
could be an inflow of funds from speculators betting on further
appreciation. However, a one-off revaluation could deal a severe blow to the
country’s manufacturing sector.

Yuan forwards traded at the biggest premium to the spot rate in more than five months, reflecting speculation the central bank will allow faster currency gains to help tame inflation.

More rapid appreciation may be a tool for curbing prices, Wang Yong, a professor at the People’s Bank of China’s training center in the city of Zhengzhou, wrote in a commentary published in today’s Securities Times newspaper. The central bank set the yuan’s reference rate 0.11 percent stronger at 6.5156 per dollar, the highest level since a dollar peg was scrapped in July 2005.

“The frequent record highs in the reference rate are pushing up appreciation bets in the offshore market,” said Liu Dongliang, a Shenzhen-based senior analyst at China Merchants Bank Co., the country’s sixth-largest lender by market value. “There won’t be any one-off move in the foreseeable future, especially when the trade surplus is narrowing.”

Twelve-month non-deliverable forwards rose 0.38 percent to 6.3235 per dollar as of 5:27 p.m. in Hong Kong, 2.9 percent stronger than the onshore exchange rate, according to data compiled by Bloomberg. That’s the largest gain projected since Nov. 11. The currency appreciated 0.21 percent today in Shanghai to 17-year high of 6.5067, the biggest gain since Feb. 18, according to the China Foreign Exchange Trade System.

Relatively large pressure for yuan gains has affected companies’ export orders, the Ministry of Commerce said on its website today. The country’s import growth may be faster than export growth this year, the ministry said. The world’s second- biggest economy had a $1.02 billion trade deficit in the first three months of this year, the first quarterly shortfall in seven years.

Consumer prices rose 5.4 percent in March from a year earlier, exceeding the government’s 2011 target of 4 percent, according to data released last week

China’s first quarterly trade deficit in seven years may ease pressure on the world’s biggest exporter to allow faster appreciation of the yuan.

Asia’s largest economy had a deficit of $1.02 billion in the first three months of the year compared with a surplus of $13.9 billion a year earlier, the customs bureau said on its website today. Imports jumped 32.6 percent to a quarterly record of $400.7 billion, helped by stronger domestic demand and higher global commodity prices, the bureau said.

China’s trading partners, including the U.S., say faster yuan appreciation is needed to help address global imbalances that contributed to the financial crisis. Premier Wen Jiabao said last month exchange-rate reform must be gradual to maintain social stability, and that boosting domestic demand is the best way the nation can contribute.

“This is a sign that China’s rebalancing efforts are advancing more rapidly than many had thought and it will take some heat off the pressure for faster yuan gains,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. He expects the trade surplus to drop to below $150 billion this year from $183 billion last year.

The trade surplus was $196 billion in 2009, down from a record $295 billion in 2008, customs data show. The gap will decline this year as exporters come under pressure from rising labor and raw material costs and imports are supported by strong domestic demand, Shen said.

Imports Surge

The surge in commodity prices, which contributed to the first-quarter trade deficit, is adding to inflationary pressure. That may prompt the government to allow faster yuan appreciation.

Inbound crude oil shipments in the first quarter rose 12 percent by volume and 39 percent by value to $43.7 billion, according to today’s customs data. The cost of iron ore imports jumped 82.5 percent to $27.7 billion while the amount of metal climbed 14.4 percent.

“China is still facing strong pressure from imported inflation,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group in Hong Kong who formerly worked for the World Bank. “While the authorities can use fiscal subsidies to offset this, the exchange rate tool is more effective to contain imported inflation.”

Liu forecasts the yuan will rise 6 percent against the dollar this year. China has held the gains to 4 percent in the past year, with U.S. Treasury Secretary Timothy F. Geithner continuing to describe the currency as “substantially undervalued.” The yuan reached a 17-year high of 6.5350 per dollar on April 8.

Record Reserves

China’s previous quarterly trade deficit was more than $8 billion in the first three months of 2004.

The unexpected $140 million surplus last month compared with the median forecast for a deficit of $3.35 billion in a Bloomberg News survey of 24 economists.

Imports in March jumped by more than economists estimated, rising 27.3 percent from a year earlier to a record $152 billion, the customs bureau said. Exports also climbed by more than expected, surging 35.8 percent to $152.2 billion and close to December’s record of $154 billion, customs data show.

Trade surpluses and currency controls have boosted China’s foreign-exchange reserves to a world record and highlighted global economic imbalances that governments from the biggest economies are debating how to resolve.

While the U.S. focuses on the yuan as a cause of an imbalance in bilateral trade, China highlights U.S. restrictions on exports of high-technology products.

China’s central bank will announce in coming days the latest figures for the nation’s foreign-exchange holdings, which climbed to $2.98 trillion in the first quarter, according to the median estimate in a Bloomberg News survey of economists

U.S. Federal Reserve Chairman Ben S. Bernanke is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. Photographer: Stephen Morton/Bloomberg

Federal Reserve Chairman Ben S. Bernanke defended his monetary stimulus to fellow central bankers, saying it will aid the world economy, and made some of his strongest criticism of China’s weak-currency policy.

The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in a speech in Frankfurt today. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

The Fed chief is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. The policy has also come under fire in the U.S., where critics, including Republican members of Congress, have said it risks fueling inflation and asset bubbles.

“Globally, both growth and trade are unbalanced,” Bernanke said. “Because a strong expansion in the emerging- market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone if the recovery in the advanced economies falls short.”

As Bernanke spoke, the Chinese central bank said it will raise the reserve ratio requirement for the nation’s banks by 50 basis points from Nov. 29. The dollar fell to $1.3671 per euro at 9:35 a.m. in New York from $1.3643 yesterday. The Standard & Poor’s 500 Index fell 0.2 percent to 1,194.17.

‘Not so Sure’

Norman Chan, chief executive of the Hong Kong Monetary Authority, the city’s de facto central bank, said he’s “not so sure” if the Fed’s purchases will help spur growth or lower the jobless rate. The “side effect” of the easing for emerging markets is adding risks of asset bubbles in the region, including in Hong Kong, Chan told reporters in the city today.

While Bernanke didn’t identify China in his speech, he took aim at “large, systemically important countries with persistent current-account surpluses.” Bernanke’s comments come a week after leaders of the Group of 20 developed and emerging nations meeting in South Korea failed to agree on a remedy for trade and investment distortions. At the summit, President Barack Obama attacked China’s policy of undervaluing its currency.

“He’s essentially saying, ‘Don’t blame us, you’re part of the problem,’” Robert Eisenbeis, a former Atlanta Fed research director, said on Bloomberg Television’s “InsideTrack.”

Bernanke said the “sense of common purpose has waned” after officials around the world united to fight the financial crisis. “Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems,” he said.

Promote Exports

China has tied the yuan to the dollar to promote exports that helped produce the fastest gains in gross domestic product of any major economy. China, which surpassed Japan’s GDP to become world No. 2 in the second quarter, recorded 9.6 percent annual growth in the three months through September. It holds about $2.6 trillion in foreign reserves, the most in the world.

China’s foreign ministry had no immediate comment when asked for a response to Bernanke’s speech. A China central bank spokesman couldn’t immediately be reached for comment.

‘Quite Skeptical’

After the speech, Bernanke spoke during a panel discussion and responded to audience questions, saying that the use of securities purchases for monetary policy affects asset prices “quite significantly.” He said he’s “quite skeptical” of the criticism that central bankers are “pushing on a string.”

At the same time, policy makers “don’t want to overpromise” on a program whose effects are “meaningful” yet “moderate,” he said on the panel with European Central Bank President Jean-Claude Trichet, International Monetary Fund Managing Director Dominique Strauss-Kahn and Brazil’s central bank president Henrique Meirelles.

It’s Bernanke’s first trip abroad since the Federal Open Market Committee made the decision, dubbed QE2 by economists and investors, to implement a second round of so-called quantitative easing. Bernanke said the term is “inappropriate” because it usually refers to policies that change the quantity of bank reserves, “a channel which seems relatively weak, at least in the U.S. context.”

‘Worthwhile Gamble’

Fed officials are trying to make the case “it was probably a worthwhile gamble for the U.S. to try to print a little bit more money to stimulate the economy without triggering inflation,” former Fed economist David Cohen, now a director of Asia forecasting at Action Economics in Singapore, said in a Bloomberg Television interview.

German Finance Minister Wolfgang Schaeuble said Nov. 5 he was “dumbfounded” at the Fed’s actions, which he said won’t aid growth and will instead contribute to imbalances by driving down the currency. U.S. monetary policy is creating “grave distortions” and causing “collateral effects” on faster- growing economies such as Brazil, Meirelles said in October.

“I don’t think anybody’s going to be all that convinced one way or the other,” said Eisenbeis, now chief monetary economist with Cumberland Advisors Inc. in Sarasota, Florida. “Everybody has their own views, particularly the Germans and the Chinese.”

Bernanke said that different economies “call for different policy settings.” In the U.S., inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” he said.

“Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole,” he said.

‘Slow Pace’

America’s unemployment rate at 9.6 percent last month is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said. He said that “we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.”

The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.

Bernanke, 56, also appealed to human concerns to justify the Fed’s policy.

“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that outcome unacceptable.”

The former Princeton University economist devoted the majority of his speech to discussing global policy challenges and tensions.

China’s vice foreign minister, Cui Tiankai, said Nov. 5 “many countries are worried about the impact of the policy,” echoing concern across Asia over the risk of a flood of capital that causes asset bubbles. Economies from Taiwan to Indonesia and Brazil have taken steps to counter inflows of speculative money, and South Korea yesterday said it will back legislation restoring a tax on foreign investment in the nation’s bonds.

Currency Intervention

Bernanke used one of nine charts to show how countries including China and Taiwan are intervening to prevent or slow appreciation in their currencies. Allowing stronger currencies would help result in “more balanced and sustainable global economic growth,” Bernanke said.

Bernanke, a scholar of the Great Depression, drew a comparison between the current period and events leading to the 1930s economic disaster. The U.S. and France maintained “persistently undervalued” exchange rates by preventing inflows of gold from feeding into money supplies, which created deflationary pressures in other countries and helped bring on the Depression, Bernanke said.

“Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today,” Bernanke said. “In particular, for large, systemically important countries with persistent current-account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.”

Nov. 12 (Bloomberg) -- Michael Novogratz, principal and director of Fortress Investment Group LLC, discusses President Barack Obama’s performance at the Group of 20 Nations leaders summit in South Korea, its implications for relations between the U.S. and China and his investment strategy in Asia. Obama attacked China’s policy of undervaluing its currency minutes after he and other Group of 20 leaders ended a summit today that failed to agree on a remedy for trade and investment distortions. Novogratz talks with Betty Liu and Jon Erlichman on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

Nov. 12 (Bloomberg) -- Thomas Hubbard, former U.S. ambassador to South Korea, talks with Bloomberg's Lisa Murphy about the prospects for a free-trade agreement between the U.S. and South Korea. President Barack Obama and his South Korean counterpart Lee Myung Bak failed to reach agreement on an accord and say talks will continue after the Group of 20 summit in Seoul. (Source: Bloomberg)

Nov. 12 (Bloomberg) -- Stephen Orlins, president of the National Committee on U.S.-China Relations, discusses U.S. relations with China and the outcome of the Group of 20 leaders summit in Seoul. President Barack Obama attacked China’s policy of undervaluing its currency minutes after the summit ended. The G-20 failed to agree on a remedy for trade and investment distortions. Orlins speaks with Betty Liu on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

President Barack Obama attacked China’s policy of undervaluing its currency minutes after he and other Group of 20 leaders ended a summit that failed to agree on a remedy for trade and investment distortions.

“It is undervalued,” Obama said of the yuan, speaking to reporters in Seoul after the meeting concluded. “And China spends enormous amounts of money intervening in the market to keep it undervalued.”

The G-20 leaders agreed to develop early warning indicators to head off economic turmoil as emergency talks on Ireland’s debt reminded them the recovery from the global financial crisis remains fragile. Obama and his South Korean counterpart, Lee Myung Bak, failed to complete a free-trade agreement.

The two-day gathering was marked by clashes over whether Chinese or U.S. policies were more to blame for economic imbalances that endanger the global recovery. China took aim at the Federal Reserve’s monetary easing, highlighting dangers it said the move posed to financial stability and rejecting policy prescriptions that fault its exchange-rate regime.

“I have to give this round to the Chinese,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “In an international negotiation like this China has seized on” the easing “to its advantage and managed to deflect any kind of criticism the U.S. might have been able give.”

Obama and Hu have arrived in Japan, where about half of the G-20 leaders will gather again in Yokohama for a weekend meeting of the Asia-Pacific Economic Cooperation forum.

Imbalance Guidelines

Finance ministers from the G-20 will work next year on a set of “indicative guidelines” designed to identify large economic imbalances and the actions needed to fix them, according to a joint statement released as the Seoul summit came to a close. The indicators will be selected with the help of the International Monetary Fund and developed next year when France holds the G-20 presidency, the statement said.

“Uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated actions,” the statement said. “Uncoordinated policy actions will only lead to worse outcomes for all.”

China has $2.65 trillion of foreign currency reserves, more than double any other country. It ran up a $201 billion trade surplus with the U.S. in the first nine months of this year, more than the U.S. deficit with the next seven-largest trading partners combined, according to Commerce Department data.

Cliff Tan, head of emerging-market currency research at Societe Generale SA in Hong Kong, said the summit did nothing to curb what he sees as an inevitable decline in the dollar against emerging-market currencies.

Dollar Weakness

“The Fed will be buying Treasuries next week and I expect the world will continue to try to diversify away from a currency they don’t particularly want more of at present,” Tan said. “And that still means a weaker dollar.”

The G-20 said emerging markets facing a surge of capital inflows can adopt regulatory steps to cope, offering them cover to limit currency swings and stem asset bubbles as the U.S. adds $600 billion of liquidity from the Fed’s quantitative easing.

“In circumstances where countries are facing undue burden of adjustment, policy responses in emerging-market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro- prudential measures,” the G-20 leaders said in the statement.

G-20 discussions were clouded by concern Ireland may need the European Union to step in with a bailout after its bond yields surged to a record, a reminder of the financial crisis that led to the first summit in November 2008.

‘Difficult Negotiations’

“These were hard and sometimes difficult negotiations,” German Chancellor Angela Merkel told reporters in Seoul. “In the end the spirit of cooperation prevailed.”

The statement didn’t mention numerical goals for curbing current account imbalances, which U.S. Treasury Secretary Timothy F. Geithner had broached until days before the summit. He said last month that a ratio for current-account surpluses or deficits of 4 percent of gross domestic product was “likely to emerge as the basic benchmark.” China and Germany, which run two of the world’s largest surpluses, rejected the idea of targets.

“We agreed that we can’t measure sustainable growth and imbalances with one indicator, but that we need a number of indicators,” Merkel said. “These indicators will now have to be discussed, and that’s what the finance ministers will take up in detail next year.”

Stephen Roach, nonexecutive Asia Chairman for Morgan Stanley, said today’s agreement may shift the focus away from the U.S.-China dispute over the yuan because it puts pressure on all G-20 nations to address trade and savings gaps.

Workable Framework

“It really gives the G-20 a far more workable framework to address the broad subject of imbalances,” Roach said in an interview from Mumbai. “This is a far more reliable alternative than to try to resolve a multilateral problem through a bilateral currency” dispute.

The People’s Bank of China set the reference rate for yuan trading at 6.6239 per dollar today, the strongest since a peg ended in July 2005. The yuan has risen about 3 percent against the U.S. currency since June 19, when China said it was allowing a resumption of appreciation that was frozen in 2008.

Obama and Hu met for 80-minutes yesterday in talks spokesmen for both presidents said were focused on the currency.

“The Chinese jealously hold their right to be flexible, their right to adjust,” said Donald Brean, co-director of the G20 Research Group at the University of Toronto. “They would not want to commit to something that is so rigid with respect to their trade imbalances. That is not to say they don’t understand the underlying forces that are causing them.”

China may report its second-largest monthly trade surplus of the year, indicating little lasting shift so far in addressing the imbalances in global spending and capital flows set to dominate a summit of the Group of 20.

The $25 billion median forecast of 27 economists for October compares with a $16.9 billion excess of exports over imports in September. The release is due tomorrow, before G-20 leaders meet in Seoul Nov. 11-12 to discuss ways to avert sustained current-account surpluses or deficits.

The shift in China’s trade balance, which was in deficit as recently as March, risks amplifying American calls for a stronger Chinese exchange rate. A failure by China, the No. 1 exporter, to alter its growth model would be a “serious” medium-term risk to the domestic and global economies, the World Bank said last week.

“It’s certainly going to be an area where the U.S. and the developed economies are likely to say ‘this indicates a misaligned exchange rate,’” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. At the same time, “it’s immensely difficult to fix the global imbalance. It will take multi-years” to shift demand patterns, he said.

The yuan weakened yesterday for the first time in five days, falling 0.3 percent to close at 6.6781 per dollar in Shanghai. The central bank has held the currency’s gain to 2.2 percent since scrapping a peg to the greenback on June 19.

China Versus Congress

“Another big trade surplus is only going to cause the U.S. Congress to intensify calls for the yuan to appreciate,” said Tim Condon, ING Groep NV’s head of Asian research, who worked at the World Bank from 1987 to 1996.

The U.S. is seeking to press China for faster gains without triggering a descent into a trade war. Companies including Caterpillar Inc., Wal-Mart Stores Inc. and Citigroup Inc. have warned American lawmakers that legislation aimed at forcing China to move could lead to retaliation.

Chinese central bank Governor Zhou Xiaochuan has said his nation needs to avoid the “shock therapy” of excessive yuan appreciation and “very fast” gains probably wouldn’t end global economic imbalances. Appreciation of 20 percent to 40 percent would exacerbate Chinese unemployment and cause social upheaval, according to Premier Wen Jiabao.

“If the yuan rises to 6 to the dollar, we’re doomed,” Simon Pan, general manager of Zhejiang Huangyan Hongfan Toys Factory, said last month at China’s biggest trade fair.

Slower Export Growth

China’s export growth may have cooled to 23 percent in October from a year earlier, compared with a 25.1 percent gain in September, according to the survey. In a note, UBS AG cited a high year-earlier base for the likely slowdown.

Condon said government measures to cool the property market may have capped imports, which rose 28.3 percent, according to the survey. He estimates China’s annual trade surplus may be more than $200 billion this year, up from $196 billion in 2009.

President Hu Jintao and U.S. counterpart Barack Obama will be among leaders wrestling in Seoul with how to counter global imbalances to reduce the threat of another financial crisis. The G-20 includes the largest developed and emerging nations, from the U.S. and Germany to Japan, China, India and Brazil.

China needs to shift toward services and consumption and away from dependence on exports, industry and investment, according to the Washington-based World Bank.

‘Shadow’ Over World

Global imbalances “and the tensions they create cast a shadow over the global outlook,” the development finance agency said. “The combination of large current-account surpluses in some countries, including China, and large current-account deficits in other countries, notably the U.S., poses financial and economic risks, including from possible tension and contentious policy responses to them.”

A slowdown in imports as the effects of domestic stimulus measures fade is a factor in China’s return to a rising trade surplus, the lender said.

U.S. Treasury Secretary Timothy F. Geithner talked last month of setting a benchmark of 4 percent of gross domestic product for assessing nations’ current-account surpluses or deficits. In contrast, speaking Nov. 6 in Kyoto, Japan, he refrained from pushing for any set target and said that addressing imbalances will “take some time.”

The U.S. has faced criticism, including from China, that its printing of money to spur growth may weaken the dollar and send more capital flowing into emerging markets, worsening their inflation and asset-bubble risks, after the Federal Reserve last week announced a decision to purchase $600 billion of Treasuries.

“The U.S. is losing bargaining power as its quantitative easing poses risks to other countries,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd.

Oct. 21 (Bloomberg) -- Michael Buchanan,
chief Asia-Pacific economist at Goldman Sachs Group Inc., talks about
the outlook for China's economy.
China’s economy grew 9.6 percent in the third quarter and inflation
accelerated to the fastest pace in almost two years, adding weight to
calls for the engine of the global recovery to let its currency
appreciate more rapidly. Buchanan speaks from Hong Kong with Maryam
Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)

Group of 20 policy makers will try
to resolve differences over exchange-rate policies this weekend
as U.S. officials continue to press China to let the yuan
appreciate faster.

The U.S. is pushing for the G-20 to agree on a statement of
cooperation on exchange-rate issues, either during the Oct. 22-
23 gathering in Gyeongju, South Korea, or at a summit of leaders
in Seoul in November, a U.S. official said today. The U.S. has
said it wants currencies to respond to market forces and
economic fundamentals, rather than government intervention.

China needs to let the yuan rise so other emerging market
nations will feel comfortable letting market forces affect their
currencies, Treasury Secretary Timothy F. Geithner said in a
Wall Street Journal interview published today, repeating a theme
from speeches he gave Oct. 6 in Washington and Oct. 18 in Palo
Alto, California. Geithner also said that “major currencies”
are “roughly in alignment now.”

Geithner’s comments show the U.S. is trying to forge a
united front among the Group of Seven nations in urging China
and other emerging market nations to let their currencies rise,
said Marc Chandler, global head of currency strategy at Brown
Brothers Harriman.

“How the dollar does against the euro and sterling might
be different than how the dollar does against Asia,” Chandler
said. He predicted there would be increasing pressure on China
at the G-20 meetings, without an international agreement on
intervention such as the Plaza Accord of 1985.

Dollar Gains

Geithner’s comments led to gains in the dollar, sending it
to 81.27 yen as of 11:32 a.m. in Tokyo from 81.09 yesterday in
New York. The dollar gained to $1.3913 per euro from $1.3964.

G-20 officials convene amid concern countries are pursuing
weaker exchange rates as a route to stronger economic growth,
either by limiting currency gains with government purchases like
China or by discussing possible monetary easing, as the U.S. and
U.K. have done.

Stuck in the middle are nations such as South Korea and
Brazil, which have introduced controls to slow currency gains
and capital inflows. China’s surprise shift to higher interest
rates this week underscores the task developing nations face as
they struggle to keep speculative cash from destabilizing their
economies.

Record Flows

Emerging-market equity mutual funds attracted more than $60
billion this year and bond funds lured $41 billion, both on pace
for record annual inflows, according to data compiled by EPFR
Global, a Cambridge, Massachusetts-based research firm. The
investment drove 19 of 25 emerging-market currencies tracked by
Bloomberg higher versus the dollar.

While Brazil has been more willing to relax its exchange-
rate controls, it is now finding that approach difficult to
sustain because of actions by other large emerging-market
nations, a U.S. Treasury official told reporters yesterday,
without naming China specifically. Brazil and India are framing
the issues the G-20 will need to tackle, the official said.

Group of 20 finance chiefs will pledge to “refrain from
competitive undervaluation” of their currencies, Dow Jones
Newswires reported, citing a draft of a statement for release
after the Gyeongju meeting. The G-20 will also promise to move
toward a “more market-determined exchange rate system,” and
seek to minimize “adverse effects of excess volatility and
disorderly movements in exchange rates,” according to Dow Jones.

IMF Roles

The U.S. backs current-account targets to gauge whether
individual trade surpluses or deficits are sustainable, and
Geithner wants the International Monetary Fund to take on a
larger role of economic surveillance, U.S. officials said. The
G-20 must help the IMF fulfill its roles in overseeing global
monetary systems and giving countries frank evaluations of their
exchange-rate policies, the Treasury official said.

Bank of England Governor Mervyn King said finance chiefs
need to reach a “bargain” to coordinate economic policies,
though real agreement would require a “revolution.”

“What is needed now is a grand bargain among the major
players in the world economy,” King said in an Oct. 19 speech
to business leaders in Dudley, England. “A bargain that
recognizes the benefits of compromise on the real path of
economic adjustment in order to avoid the damaging consequences
of a move towards protectionism.”

‘Weapon of Choice’

“The weapon of choice today is a competitive
devaluation,” Nobel Prize-winning economist Joseph Stiglitz
said yesterday in an interview on Bloomberg Radio’s “The Hays
Advantage” with Kathleen Hays. “Of course, not everybody can
weaken their currency relative to others.”

Geithner last week delayed a report on foreign-exchange
markets, saying the yuan remained undervalued and that China
needed to show continued commitment to allowing the currency to
rise against the dollar over time. The yuan has risen 2.7
percent since a two-year peg against the dollar was scrapped on
June 19.

Fed Takes aim at Chinese Yuan - fuels Commodity & Gold Rally

Gary Dorsch
Editor Global Money Trends magazine
Posted Oct 13, 2010

Although the United States is still the
world’s #1 economy, it’s increasingly feeling the heat of the Chinese
dragon, breathing down its neck. At the beginning of the twenty-first
century, the US-economy was eight-times larger than China’s - a decade
later the figure was down to three-times. China’s
$5-trillion economy has eclipsed Japan, Germany, France and Britain, to
become the second-biggest, after three decades of blistering growth,
and is now within reach of overtaking the US within 10-years. With
China’s economic growth rate at 10% and the US-economy struggling at
+1.5% growth, - this long-term prediction doesn’t sound that
far-fetched.

China, with 10-times Japan’s population,
has long been expected to catch up with its neighbor. But the global
crisis and Japan’s sluggish growth brought that point forward by many
years. China has emerged to become the world’s largest exporter,
overtaking Germany, which held the title since 2002. Factories employing
low-paid workers to assemble iPods, computers, shoes, and toys are
leading the boom. China has also passed the US as the world’s largest
auto market and producer. Two decades ago, a car industry barely existed
in China.

In the midst of the global banking crisis,
stimulus-driven Chinese growth helped to propel the world’s economy out
of recession. Chinese demand for raw materials and other imports buoyed
economies from Australia to Brazil to South Korea. China uses more than
half the world’s iron ore and more than 40% of its steel, aluminum, and
coal, lifting commodity prices. China is the biggest player in the
copper market, buying 35% of the global supply, and is the second
biggest importer of crude oil. State-owned Chinese companies are pouring
billions of dollars into base metal mines and oil fields from Canada to
Latin America to Iraq.

A free trade agreement between China and
South East Asian nations came into effect on January 1st, creating the
world’s third-largest free trade bloc. The combined population of the
trade bloc is 1.9-billion people with a combined GDP of $6-trillion.
Already, the ASEAN countries are providing the raw materials and
manufacturing parts for assembly hubs operating in China. About 60% of
China-ASEAN made goods end up in European, Japanese, and US consumer
markets.

China is at the epicenter of the fast
growing Asian sphere, with satellites such as South Korea, Hong Kong,
Taiwan, India, and Australia, hitching a ride to the Chinese juggernaut.
The shift of economic gravity to China didn’t happen by chance.
Beijing’s massive intervention transformed its economy into the world’s
locomotive. The state-run mouthpiece, the People’s Daily newspaper has
hailed China’s economic superiority over Western-style capitalism,
boasting about its authoritarian rulers’ ability to make quick decisions
and their will to carry them out.

Washington is becoming increasingly
alarmed at the rapid rise of China’s economic might, and also worries
that Beijing might eventually challenge the US for military superiority
in the decades ahead. US Congressional lawmakers have long cited
Beijing’s policy of undervaluing its currency, - the yuan, to give its
exporters an unfair advantage in world markets, and making China a more
affordable place to attract foreign direct investment in new
manufacturing plants. In July and August, the US ran a combined trade
deficit of about $52-billion with China, with the massive imbalance
highlighting the hollowing out of America’s industrial base.

After holding the yuan steady against the
US-dollar through the financial crisis, Beijing signaled on July 19th,
that it would begin to allow for the yuan to drift higher, but at a
gradual pace. Since then, the yuan has gained about +2.2%, - far short
of what US lawmakers want. US Treasury chief Timothy Geithner told
Congress on Sept 16th, “the pace of appreciation has been too slow and
the extent of the yuan’s appreciation too limited. We are examining the
important question of what mix of tools, those available to the United
States and multilateral approaches, might help encourage the Chinese
authorities to move more quickly,” he warned. IMF economists estimate
the yuan is 5-27% undervalued.

As the US-economy continues to stagnate,
lifting the all inclusive U-6 jobless rate to 17.1% of the workforce,
the Obama administration and Congress are starting to wage an
increasingly hostile war against China, demanding that Beijing allow the
yuan to rise significantly, and at a faster rate. The US House of
Representatives passed a bill on Sept 29th, with huge support of 348-79,
that treats China’s exchange rate as an unfair subsidy, and allows US
companies to request a countervailing tariff to offset China’s price
advantage. Such legislation, if passed by the Senate, and signed by the
President could ignite a full fledged protectionist trade war.

The US-Treasury and the Federal Reserve
(“Plunge Protection Team”) are seeking to corral central bankers and
finance ministers from other G-20 nations, to join Obama’s campaign to
strong-arm Beijing into raising the value of the yuan more quickly. The
US-Treasury is preparing an all-out “currency war,” which has already
started to inflate commodity and stock market bubbles, by instructing
the Federal Reserve to send signals about a resumption of “quantitative
easing” (QE-2) or the printing of dollars to purchase US Treasuries
notes, in the months ahead.

The Fed is expected to pump vast
quantities of freshly printed dollars into the money markets, in a bid
to lower long-term Treasury yields lower. The markets have already
discounted the probability of at least $500-billion of QE-2 injections.
On the surface, the Fed’s propaganda artists say they aim to prevent a
deflationary collapse and stave off a “double-dip” recession. However,
clandestinely, the Fed is monetizing the federal government’s debt, and
is prepared to buy the Treasury notes that Beijing decides to dump,
should a full scale Chinese-US trade war erupt.

Discounting the probability of QE-2, the
US-Treasury’s bond yield advantage over comparable Japanese bonds, has
narrowed sharply, thus weakening the US-dollar to a 15-year low of
81.75-yen. Tokyo has tried to offset the Fed’s QE-2 gambit, saying it
plans to launch its own version of QE-3, - a 5-trillion yen ($60-bil)
scheme, designed to purchase Japanese government bonds (JGB’s) and other
securities.

On September 15th, Tokyo acted
unilaterally, dumping some 2.1-trillion yen into the foreign currency
market, for the first time in six-years, and purchasing of $25-biilion,
while trying to defend the US-dollar at 83-yen. However, two-weeks
later, the impact of the BoJ’s “shock and awe,” intervention scheme had
worn-off, with the US-dollar sinking to new lows. Japan’s counterattacks
have failed to reverse the US-dollar’s slide against the yen, because
the size of the Fed’s QE-2 printing spree is expected to be at least
ten-times greater magnitude than Tokyo’s QE-3.

And because Beijing essentially pegs the
yuan to the US-dollar, Japan’s exporters are getting slapped with a
double whammy, a rising yen versus the US-dollar, and a rising yen
versus the Chinese yuan. Since early May, the yen has risen +10% to
around 8.2-yuan, making Japanese goods more expensive in China, and also
in neighboring Hong Kong, where the central bank pegs the US$ at around
HK$7.78.

Tokyo’s financial warlords are very
worried about the yen’s strength, since the growth rate of Japan’s
exports have already slowed by two-thirds, from +45% at the start of
this year, to +15% in August. Japan’s exports are also becoming less
competitive than those from Asian tiger - Taiwan, where the central bank
enforces a “dirty float,” by restricting the US-dollar to a narrow 10%
trading band versus the Taiwan dollar. If left unchecked, the yen’s
upward spiral against rigged Asian currencies, and the US$, could push
Japan’s export growth into negative territory by next year.

Taiwan’s exports account for roughly 70%
of its economic output, and trade data for September showed the growth
rate for its exports slowing to +17.5%, down from +26.6% in August. A
slowdown in the growth of shipments to the Chinese mainland, where many
goods are processed and re-exported, fell from +18.1% in August to +11%
in September. All of this suggests Taiwan’s authorities will not back
down from its efforts to slow the US-dollar’s fall, against the Taiwan
dollar.

Taiwan’s foreign currency reserves jumped
$8.4-billion in September, a monthly record, and by about $21-billion in
the past 3-½-months. In the first 10-days of October, the Taiwanese
central bank bought US$3-billion to prevent it from falling below its
red-line in the sand at 30.5-Taiwan dollars, the bottom of a decade long
trading range. Through its stealth intervention over the past few
years, Taiwan has amassed a huge stash of $380-billion in foreign
currency reserves. Yet shockingly, only 4.3% of Taiwan’s FX stash is
invested in the king of currencies – Gold.

The US Treasury and the Obama team have
allowed currency intervention culprits, such as Hong Kong’s Monetary
Authority (HKMA) and Taiwan, to slip under the radar, and instead, have
chosen to focus more exclusively on Beijing’s rigging of the yuan.
However, the smaller Asian culprits might be next in-line. In any event,
Washington is trying to gain the firm backing of the world’s second
most powerful trading bloc, the Euro-zone, which is also the biggest
buyer of Chinese exports, in order to prod Beijing to allow the yuan to
rise more rapidly.

China stiffened its opposition to a
rapid appreciation of the yuan, setting the stage for a
confrontation over exchange rates at this week’s international
monetary meetings in Washington.

Premier Wen Jiabao said China will stick to its policy of
gradually increasing the currency’s flexibility and lashed out
at European Union leaders for teaming with the U.S. to pressure
the Chinese government.

“Europe shouldn’t join the choir” clamoring for a higher
yuan, Wen told a business conference yesterday before an EU-
China summit in Brussels. “If the yuan isn’t stable, it will
bring disaster to China and the world. If we increase the yuan
by 20-40 percent as some people are calling for, many of our
factories will shut down and society will be in turmoil.”

China has capped the yuan’s rise at 2 percent since
relaxing a dollar peg in June, leading to criticism that it is
stunting the recovery in the industrial world by shielding its
market from U.S. and European imports.

International exchange-rate diplomacy shifts into high gear
at the Oct. 8 Group of Seven meeting in Washington after China
rebuffed EU and U.S. pleas, the Bank of Japan sought to drive
down the yen by unexpectedly easing monetary policy, and
Brazilian Finance Minister Guido Mantega warned of a global
“currency war.”

“There’s a game of brinksmanship being played,” David Cohen, an economist at Action Economics in Singapore, said in a
Bloomberg Television interview. “I suspect at the end of the
day the Chinese will agree to return to gradual appreciation of
their currency.”

Europe’s Exports

The 16-nation euro region’s trade deficit with China
widened 6.7 percent to 48.1 billion euros ($67 billion) in the
first half of 2010. The U.S. deficit with China widened 16
percent to $119 billion.

Noting that Europe’s exports to China still rose more than
40 percent in the first half, Wen rejected a call by European
Commission President Jose Barroso for an “orderly and broad-
based appreciation” of the yuan.

“If China’s economy goes down, it’s not good for the world
economy,” Wen said. Time constraints were given as the reason
for cancelling a post-summit press conference with Barroso and
EU President Herman Van Rompuy.

China’s currency policy wasn’t mentioned in a joint
communiqué issued after the summit. In the 11-paragraph
statement, the two sides called for “further concerted
efforts” toward “sound fiscal policies that would guarantee
the sustainability of public finances while being growth-
friendly.”

Boiled Over

U.S. impatience with China boiled over on Sept. 29 when the
House of Representatives passed a measure that would let
American companies seek import duties to prevent Chinese
manufacturers from using an artificially weak yuan as a
competitive tool. The measure won’t go to the Senate until after
U.S. congressional elections in November.

The euro has risen 16 percent against the dollar, 14
percent against the yuan, 6 percent against the Japanese yen and
6 percent against the British pound in the past four months. The
four countries bought a third of the euro region’s 1.3 trillion
euros in exports last year.

China’s nudge to the yuan since June has been “not exactly
what we would have hoped ourselves,” European Central Bank
President Jean-Claude Trichet said this week.

European growth probably eased from a four-year high of 1
percent in the second quarter to 0.4 percent in the third
quarter and will slip to 0.3 percent in the fourth, the Munich-
based Ifo institute, Rome-based Isae and Insee in Paris said
yesterday in a joint forecast. The European statistics office
cut its estimate of second-quarter consumer spending growth to
0.2 percent from 0.5 percent, indicating the region’s reliance
on exports.

‘Disproportionate Burden’

“If the euro continues to bear a disproportionate burden
in the adjustment of global exchange rates, the recovery of the
euro area’s economy might be weakened,” EU Economic and
Monetary Commissioner Olli Rehn said on Oct. 5.

China’s economy will grow 10.5 percent in 2010 and 9.6
percent next year, beating rates of 1.7 percent and 1.5 percent
for the euro region, the International Monetary Fund said
yesterday.

European Union Monetary Affairs Commissioner
Olli Rehn, seen here, told reporters, “If the euro continues to bear a
disproportionate burden in the adjustment of global exchange rates, the
recovery of the euro area’s economy might be weakened.” Photographer:
Hannelore Foerster/Bloomberg

China’s snub of pleas for a faster
appreciation of the yuan triggered concern that Europe’s
faltering economic recovery may suffer a further blow.

European officials voiced disappointment today that China
didn’t go beyond a June pledge to ease the yuan away from a
dollar peg, leaving the euro at the mercy of depreciating
currencies in China, the U.S., Japan and Britain.

“If the euro continues to bear a disproportionate burden
in the adjustment of global exchange rates, the recovery of the
euro-area’s economy might be weakened,” European Union Monetary
Affairs Commissioner Olli Rehn told reporters after a Europe-
China economic summit in Brussels today.

China’s rebuff and Japan’s efforts to weaken its currency
reflect the limited coordination of international economic
policy and make it harder for the 16-nation euro region to
export its way toward a stronger rebound from the deepestrecession in seven decades.

Europe’s economy is showing signs of slowing after growth
spurted to 1 percent in the second quarter, the fastest pace in
four years. Unemployment held at the highest in more than 12
years in August and manufacturing weakened in September.

The euro region’s trade deficit with China widened to 48.1
billion euros ($66 billion) in the first half of 2010 from 45.1
billion euros a year earlier. Unlike the U.S., Europe’s overall
trade account is in surplus, estimated at 1.9 billion euros for
the first seven months.

China’s moves to boost the yuan since June have been “not
exactly what we would have hoped ourselves,” European Central
Bank President Jean-Claude Trichet said after the meeting.

Yuan Peg

Amid criticism from the U.S. and Europe, China has capped
the yuan’s gains at about 2 percent against the dollar since the
People’s Bank of China loosened a two-year peg of 6.83 per
dollar in June.

“This is certainly not the kind of leap forward that, for
example, the United States and maybe to a certain extent also
the European Union, had expected,” EU Trade Commissioner Karel De Gucht said in a Bloomberg Television interview yesterday. “I
have my doubts whether you can influence that by international
pressure.”

People’s Bank of China Governor Zhou Xiaochuan said the
Chinese government doesn’t feel that it is under pressure to
budge on currencies and declined to say whether today’s European
pleadings will have an effect.

‘Exchanging Views’

“It’s not really about putting pressure, it’s just
exchanging views as always,” Zhou said in a post-meeting
interview.

Chinese Premier Wen Jiabao opposed a sudden currency
realignment, saying yesterday that “we should intensify
macroeconomic policy coordination, manage with caution the
timing and pace of an exit strategy from economic stimulus and
keep the exchange rates of major reserve currencies relatively
stable.”

Wen took part in today’s EU-China economic consultations,
along with Zhou and Finance Minister Xie Xuren. The euro region
was represented by Trichet, Rehn and Luxembourg Prime MinisterJean-Claude Juncker, who heads the committee of euro finance
ministers.

While the European side said Wen promised greater currency
flexibility, perceptions diverged over the pace and extent of
any revaluation of the yuan. The Chinese officials skipped the
post-meeting press conference. Wen will hold a separate meeting
with EU leaders tomorrow.

‘Broadly Undervalued’

“There’s a divergence of analysis between the Chinese
authorities and the European authorities,” Juncker said. “We
think the Chinese currency is broadly undervalued.”

The euro has risen 15 percent against the dollar and 5
percent against the Japanese yen in the past four months. Since
China’s currency shadows the dollar, the euro has gone up
against the yuan as well.

Facing a slowing recovery, the Bank of Japan today pledged
to keep its main interest rate at “virtually zero” to ward of
deflation and to expand its balance sheet. The loosening of
policy pushed down the yen against the dollar and euro.

In the U.S., Federal Reserve Chairman Ben S. Bernanke is
relying on asset purchases to brighten the economy and may
engage in further buying.

U.S. impatience with China mounted on Sept. 29 when the
House of Representatives passed a measure that would let
American companies seek import duties to prevent Chinese
manufacturers from using an artificially weak yuan as a
competitive tool. The measure won’t go to the Senate until after
U.S. congressional elections in November.

Sept. 30 (Bloomberg) -- Michael
Hasenstab, co-director of international bonds in Franklin Templeton
Investment's fixed-income group, talks about the U.S. House of
Representatives passage of a measure that pressures China to appreciate
the yuan.
Hasenstab, speaking with Betty Liu on Bloomberg Television's "In
the Loop," also discusses his bond market investment strategy. (Source:
Bloomberg)

China bashing is all the rage in
Washington, as politicians of both parties blame the world’s
fastest-growing major economy for high jobless rates in the U.S.

Such a popular target is China that the U.S. House of
Representatives, all but paralyzed by the prospect of next
month’s election, easily passed a bill last week that might
impose tariffs on China in retaliation for currency
manipulation.

Blaming China is fun for the political and intellectual
elites because it allows them to ignore their own failures.
Gridlocked politicians on both sides of the aisle are equally
attracted to the claim. The problem with U.S. growth isn’t that
we have an out-of-control government and the second-highest
corporate tax rates on earth; it’s all China’s fault.

As political scapegoating goes, this is easy -- too easy.
In truth, the impact on the U.S. economy of a change in Chinese
currency policy could well be so small that it would be almost
impossible to detect.

First consider the arguments of those who say the U.S.
would see significant benefits from a more freely floating yuan.

C. Fred Bergsten of the Peterson Institute for
International Economics testified in the House last month that
“elimination of the Chinese misalignment would create about
half a million U.S. jobs, mainly in manufacturing and with
above-average wages, over the next couple of years.”

Toward Equilibrium

How to accomplish that? Bergsten estimates that an
appreciation of about 25 percent against the dollar would be
necessary to restore an equilibrium exchange rate. When he
testified on Sept. 15, the yuan had risen at an annualized rate
of only about 4 percent since June, when the Chinese government
pledged more flexibility. The growth rate does seem to have
increased since Sept. 15.

Bergsten recommends that the U.S. designate China as a
“currency manipulator” and encourage other nations to apply
pressure on China to change its policy. He also says the U.S.
should engage in “countervailing currency intervention,” which
means purchasing yuan to offset China’s dollar purchases.

There is a good deal of academic disagreement over the
Bergsten analysis. Helmut Reisen, head of research at the OECD
Development Center, part of the Organization for Economic
Cooperation and Development, wrote in April that “it is far
from assured” that an appreciation of the yuan would influence
current account balances.

He added, “There is a clear political focus on the
bilateral U.S.-Chinese trade balance, but bilateral imbalances
are of no economic interest -- there are more than two countries
in the world.”

Ripple Effects

Philip Levy, my colleague at the American Enterprise
Institute, shares this view. The ripple effects throughout the
trading world of a more flexible yuan could be enormous,
diluting the specific impact on any one country, even if that
country is the U.S.

If we buy fewer imports from China, we might just buy more
from some other country. A sign that this effect might be
important, Levy argues, is that even while Chinese imports into
the U.S. have been surging, total Asian imports have been
roughly constant. This suggests that at least part of the impact
of a change in Chinese currency policy would be a tweak in U.S.
trade with Malaysia or Japan.

Economist Ray Fair of Yale University attempted to account
for ripple effects in a paper that analyzed the macroeconomic
impact of Chinese revaluation.

“The estimated effects on U.S. output and employment are
modest,” he wrote. “Positive effects on U.S. output from a
decrease in imports from China are offset by negative effects on
U.S. output from increased inflation and from a decrease in U.S.
exports to China because of a Chinese contraction.”

History as Guide

History also is a guide. If changes in the exchange rate
are truly a big deal, then the U.S. trade deficit with China
should have decreased during the Chinese currency appreciation
from 2005 to 2008. Instead, it grew.

Then there’s the question of scale.

Assume that starting in August 2008, when China’s last
revaluation ended, U.S. imports from China started tracking
those of Japan, another big Asian trading partner of the U.S.
that does let its currency float. Under that scenario, imports
from China this year would have been about $27 billion lower. In
a $14 trillion economy, that is hardly enough to have much of an
impact on jobs, especially if imports from other countries
increase.

Economic policies with uncertain benefits can be defensible
if they carry no cost. Bashing China has real costs: It might
cause a trade war reminiscent of the one that put the world
economy into a death spiral in the 1930s. And it definitely
distracts attention from the need for government policies that
directly help the U.S. economy and those looking for jobs.

So isn’t it time we left China alone?

(Kevin Hassett, director of economic-policy studies at the
American Enterprise Institute, is a Bloomberg News columnist. He
was an adviser to Republican Senator John McCain in the 2008
presidential election. The opinions expressed are his own.)

The global financial crisis has shown
the need for China to focus on “structural problems” in its
economy including taking steps to encourage more domestic
demand, Premier Wen Jiabao said.

“We can rely on stimulating domestic demand to stabilize
and further grow the Chinese economy,” Wen said in an interview
with CNN’s “Fareed Zakaria GPS” program taped Sept. 23 in New
York and scheduled for broadcast tomorrow. In the interview,
Wen, 68, also said he’s concerned China’s stability may be
threatened by inflation and corruption and that he remains
committed to pressing for changes in China’s political system.

Wen said he argued even before the recession that China’s
economic development “lacks balance, coordination and
sustainability. This financial crisis has reinforced my view on
this point.”

China’s economy has expanded more than 90-fold in the past
three decades, fueled by exports to countries such as the U.S.
Treasury Secretary Timothy F. Geithner and U.S. lawmakers have
urged the country’s leaders to look more to domestic markets for
growth. They have also pushed China to allow faster appreciation
of its currency, arguing that an undervalued yuan gives Chinese
manufacturers an unfair advantage in export markets.

The U.S. trade deficit with China widened to $145 billion
in the first seven months of this year, from $123 billion for
the same period in 2009.

Currency Conflict

Wen criticized some U.S. lawmakers for pressing China to
increase the value of its currency.

“Some people in the United States, in particular some in
the U.S. Congress, do not know fully about China,” Wen said.
“They are politicizing the problems in China-U.S. relations.”

On Sept. 29, the U.S. House passed legislation prodding
China to raise the value of the yuan. Under the bill, U.S.
companies would be allowed to petition for duties on imports
from China to compensate for the effect of an undervalued yuan.

The yuan gained 1.74 percent last month, the biggest
monthly advance since a dollar peg was ended in July 2005,
according to data compiled by Bloomberg.

Wen said China’s goal is to “have balance and sustainable
trade with other countries.”

“China does not pursue a trade surplus,” he said.

Wen said that after China’s 4 trillion-yuan economic
stimulus program, controlling inflation is a priority. Inflation
“is something that I have been trying very hard to manage
appropriately and well,” Wen said. “Corruption and inflation
will have an adverse impact on the stability of power in our
country.”

Real Estate Prices

Wen is trying to cool down the country’s property market as
house prices soar and become increasing unaffordable for China’s
middle class. Last month China’s government added to curbs by
tightening down-payment rules for first homes, suspending third-
home loans and pledging to quicken a trial of a property tax.

China’s plan to stimulate the economy with government
spending has been a success, ensuring “the continuance of
steady and relatively fast economic growth,” Wen said.

Economic growth moderated to 10.3 percent in the second
quarter from 11.9 percent in the previous three months. The pace
may slow to 8.7 percent in the fourth quarter, according to the
median estimate in a Bloomberg News survey of economists.

Still, China’s manufacturing expanded at the fastest pace
in four months in September, adding to signs that economic
growth is stabilizing.

Wen said the $814 billion U.S. stimulus package and Obama’s
goal of increasing exports are helping the American economy.

“Although they came a little bit late, they still came in
time,” Wen said.

Confidence in U.S.

With its tradition of “scientific and technological talent
and managerial expertise,” the U.S. “will tide over the crisis
and difficulties,” Wen said on CNN. “We must have confidence
in the prospects of the U.S. economy,” he said. The U.S.
recovery “is in the interest of the recovery and stability of
the world economy,” he said.

Wen also addressed political changes, which critics said
have been outpaced by the country’s economic growth.

“The people’s wishes for and needs for democracy and
freedom are irresistible” he said.

China has 400 million Internet users and 800 million mobile
phone subscribers, some of whom use the technology to criticize
the government, Wen said.

Google Inc., the owner of the world’s most popular Internet
search engine, has continued to express concern about being
pressured to censor search results in China.

Google Attacks

Earlier this year, after a series of attacks on Google
computers, the Mountain View, California-based company said it
would stop censoring search results and instead redirect
visitors to its unfiltered Hong Kong site.

“I hope that you will be able to gradually see the
continuous progress of China,” Wen said.

The premier is a former aide to the late Communist Party
General Secretary Zhao Ziyang, who was ousted from his post in
the wake of 1989 protests on and around Beijing’s Tiananmen
Square. Wen was photographed with Zhao visiting protesting
students in the square that year.

In a speech in the southern city of Shenzhen in August, Wen
argued for more political overhaul to cement China’s economic
gains.

Wen said on CNN that he believes the future generation of
Chinese leaders will make the country even more prosperous.

“I have confidence that future Chinese leadership will
excel the previous one.”

Wen and President Hu Jintao are set to step down from their
Communist Party posts in late 2012 and from their government
positions in March 2013. The party’s Central Committee will meet
later this month as a younger generation of leaders jostle for
the top jobs.

It is unwise behavior to attack China, which owns a huge percentage of
U.S. debt, for its currency policies. This is especially true since
the U.S. will continue to float immense quantities of new debt to cover
budget deficits in coming years, and an unintended consequence is that
China decides to not buy more U.S. paper, or worse, sells their U.S.
debt.

Should either of these probabilities occur, the result would be a
further weakened dollar. China could easily cause an increase in U.S.
interest rates and put pressure on the U.S. Federal Reserve to undertake
ever more quantitative easing. In other words, the U.S. Federal
Reserve will have to buy the bonds issued by the U.S. Treasury or other
organs of the U.S. government. This is printing money to pay bills, and
historically it has proven to be an ineffective solution.

An increase in either quantitative easing and/or further declines in
the value of the U.S. dollar could have a cascading effect. Quite
probably, it will cause the dollar to fall further, and create a spiral
of dollar price declines. As the dollar declines, gold and foreign
currencies rise. This is one reason why we remain bullish on gold and
well-run foreign currencies.

GENEVA, Sept 29 (Reuters) - China said the United States
should take action to stabilise the dollar, criticising
Washington's expansionary monetary policy for weakening the
currency despite its key role in the global financial system.

The comments by a Chinese official at a meeting of the World
Trade Organization came as the U.S. House of Representatives was
set to pass a bill putting pressure on China to let the yuan
rise faster. [ID:nN28172488]

China's ambassador to the WTO, Sun Zhenyu, told a review of
U.S. trade policy that the dollar played a unique role in the
international monetary system while U.S. policy had a
significant impact globally.

"We are very much concerned about how the U.S. would take
practical and responsible measures to prevent the dollar glut
and maintain the stability of the currency," Sun said.

China had raised the same question at the last U.S. trade
review in 2008 but had not received an answer.

Sun said the dollar had been depreciating for eight years,
while the U.S. government had run a growing budget deficit,
resulting from an expansionary monetary policy, particularly
quantitative easing -- purchases by the U.S. Fed of bonds and
other assets to expand its balance sheet -- since the crisis.

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Yuan banknotes are seen in this picture illustration taken in Beijing September 24, 2010.

Credit: Reuters/Petar Kujundzic

By Chris Buckley

BEIJING |Thu Sep 30, 2010 5:01am EDT

BEIJING
(Reuters) - China on Thursday warned that a House of Represenatives
bill to penalize it for not letting the yuan rise faster could seriously
affect bilateral ties.

In a relatively measured
response, Foreign Ministry spokeswoman Jiang Yu said Congress should
avoid steps that could harm relations, saying Beijing was "resolutely
opposed" to the bill. But she declined to say whether China would
retaliate.

The House of
Representatives bill, which many analysts say is unlikely to become law,
is aimed at pressuring Beijing to let its currency, also called the
renminbi, rise faster by branding it in violation of world trade rules.

"Using
the renminbi exchange rate issue as an excuse to engage in trade
protectionism against China can only harm China-U.S. trade and economic
relations, and will have a negative effect on both countries' economies
and the world economy," Jiang told a regular news briefing.

"We
urge the members of the Congress to understand clearly the importance
of China-U.S. trade and economic relations, and put a halt to
protectionism so as to avoid hurting the interests of the peoples of the
two countries and of the world."

Whether China would take any U.S. law on the yuan to the World Trade Organization was "hypothetical," she said.

The
bill would need to be passed by the Senate -- far from certain and not
likely until after congressional elections on November 2 when the U.S.
political landscape could be greatly changed -- and signed by President
Barack Obama to become law.

China's
tight leash on the yuan is under intense scrutiny as countries around
the world look to export their way back to economic health, raising
concerns they will intentionally weaken their currencies to gain an
edge.

PRICE ADVANTAGE

The
bill allows the U.S. Commerce Department to treat "fundamentally
undervalued currencies" as an illegal export subsidy so that U.S.
companies can request a countervailing duty to offset China's price
advantage.

Earlier in the day, the
official Xinhua news agency quoted China's Commerce Ministry spokesman,
Yao Jian, as saying: "Starting a countervailing investigation in the
name of exchange rates does not conform with relevant WTO rules."

That
lawyer-like statement was relatively moderate compared with China's
reaction to other disputes this year, including U.S. weapons sales to
Taiwan, when Beijing froze military contacts with the United States.

"I
don't think China will have any dramatic reaction to this bill's
passing," said Jin Canrong, a professor of international relations at
Renmin University in Beijing, who specializes in U.S.-China relations.
"China wants to preserve the stability of overall relations."

The
American Chamber of Commerce in China voiced its opposition to the
Chinese currency legislation in an email, saying: "If enacted into law,
the chamber does not believe the bill will be effective in achieving its
objectives and would fail to create significant U.S. job growth."

I'm clapping right now for my government. Finally they are fighting back from all the jobs China has stolen from us and the rest of the world by purposely holding the yuan down. It is great to see bipartisanship on this issue.

WASHINGTON — The House of Representatives sent a unusually confrontational signal to the Chinese leadership on Wednesday, voting overwhelmingly to give President Obama the authority to impose tariffs on all Chinese imports — more than $300 billion this year — in retaliation for Beijing’s refusal to revalue its currency.

The vote was 348 to 79.

The bill is unlikely to become law because the prospects for Senate approval are dim.

Nonetheless, the action was intended to hand President Obama additional leverage in what has become a major flashpoint between the world’s two largest economies. While tariffs have been slapped on specific products, from steel to tires, because of evidence of unfair export subsidies, the threat to put sizable tariffs on a country’s entire line exports to the United States is highly unusual — and, some argue, of dubious legality under international trade law. It reflects both election-year politics over jobs and huge frustration over unfulfilled promises by China to allow its currency to rise in value, which would make Chinese goods less competitive in the United States.

China, which was the largest importer of US chicken in 2009 ($752.2 million), yesterday imposed new import duties on chicken parts and whole birds, which range from 50.3% to 105.4% and will be in place for the next five years.

The Chinese government says US producers are engaged in "dumping" which makes it difficult for China's domestic chicken industry to compete.

Jeez, I wonder what that must be like.

I'll just sit around tonight and ponder this in my $3 Chinese-made t-shirt while I watch a movie on my $20 Chinese-made DVD player after which I will clean the apartment with my $79 Chinese-made vacuum, order some $5 Chinese food from the place on the corner, then drift off to sleep on my $199 Chinese-made mattress between my $19 Chinese-made sheets.

No hardball is not the way to go here. China feels like they are under attack and that isn't helping. You want them to end the dollar peg, get in bed with them, show respect and then screw them because if they end the peg, the chinese will be screwed.

Hi fastfoot, I laugh at the so called experts today on the news most recommending investors to sell gold and take profits, again thinking short term unlike the Chinese who don't worry about day to day fluctuations. There are more and more reasons for North Americans to hold on to and accumulate more gold and silver in particular.

Hi fastfoot, I laugh at the so called experts today on the news most recommending investors to sell gold and take profits, again thinking short term unlike the Chinese who don't worry about day to day fluctuations. There are more and more reasons for North Americans to hold on to and accumulate more gold and silver in particular.

Hi fastfoot, I laugh at the so called experts today on the news most recommending investors to sell gold and take profits, again thinking short term unlike the Chinese who don't worry about day to day fluctuations. There are more and more reasons for North Americans to hold on to and accumulate more gold and silver in particular.

Hi fastfoot, I laugh at the so called experts today on the news most recommending investors to sell gold and take profits, again thinking short term unlike the Chinese who don't worry about day to day fluctuations. There are more and more reasons for North Americans to hold on to and accumulate more gold and silver in particular.

Frank - you are so right -- China is playing this game like a game of Chess- Each play is scrutinized for advantages & disadvantages not just for to-day but for the long term. They are holding a lot of good cards by not bailing too quickly on their U.S. debt holdings. Without the Chinese the U.S. dollar would plummet even faster. Nevertheless, they are reducing U.S. treasuries in a very calculated manner - in other words they are slowly releasing the air from the balloon.

Yes , unlike the U.S. who have NO long term plan, the Chinese are planning ahead for many decades. I've said it before & I will repeat it - the 21st century will belong to the Chinese IMHO.

A very tricky problem playing hardball against your biggest creditor. It is like The Golden Rule. He that has all the gold makes the rules and China is sure accumulating goldand everything else that they will need in the future. It has a tricky problem as well trying to keep the dollar propped up in the hope of a gradual loss in the value of the dollar than a sudden collapse in which everybody loses. We must remember China thinks about their future over a hundred year time period while we look at things very very short term.

It's about time our government plays hard ball. The Chinese have rigged the game for years and it's cost Americans too many jobs. I hope they actually follow through on this and the rest of the world comes with us. If no one buys from the Chinese then maybe they'll listen.

The last thing China wants to do is get bullied into doing somehting that will send jobs away from its country. This is a very important issue. If the US wins, China still knows it is at best #2 but if China refuses which I think it will then they believe they are going to be or should be number 1. Very interesting stuff and it could be the start of an economic war

Sept. 27 (Bloomberg) -- Robert Hormats,
U.S. undersecretary of state for economic affairs, talks about a White
House initiative to double exports over five years as a driver of
economic growth.
Hormats, speaking with Carol Massar and Matt Miller on Bloomberg
Television's "Street Smart," also talks about U.S.-China trade issues.
(Source: Bloomberg)

China may retaliate against U.S.
businesses operating in the country if Congress passes
legislation intended to force a revaluation of the yuan,
representatives of those companies said.

China “is looking for another bad guy” after decades of
tension with Japan, Robert Roche, the chairman of the American
Chamber of Commerce in Shanghai, said at a briefing in
Washington yesterday. “We are going to fit that bill.”

The House of Representatives is set to consider legislation
this week that would let companies petition for higher duties on
imports from China to compensate for the effects of a weak yuan.
Representatives of the American Chambers of Commerce in China
were in Washington warning congressional aides, administration
officials and lobbyists about rising commercial tensions between
the nations.

“This step would make it harder for us to export to
China, not easier,” Timothy Stratford, a partner in Beijing at
Covington & Burling LLP and a former U.S. trade official, said
of the legislation that was approved by the House Ways and Means
Committee on a voice vote last week.

The U.S. trade deficit with China widened to $145 billion
in the first seven months of this year, from $123 billion for
the same period in 2009. The expanding deficit, unemployment
lingering at almost 10 percent and polls showing Democrats’
seats at risk heading into the election added support for the
currency bill, which has been discussed since 2005.

Gain Called Inadequate

The yuan has strengthened 1.9 percent against the dollar
since June 19, when China’s central bank said it would pursue a
more flexible exchange rate. That rate of gain is inadequate,
Treasury Secretary Timothy F. Geithner told the Ways and Means
Committee this month.

The Chinese leadership has already been persuaded that
gradually lifting the value of the yuan is in the nation’s own
interest because it will give consumers more buying power and
help control inflation, Stratford said. “They are trying to
figure out how to adjust over time,” he said.

That may be delayed by House passage of the measure, saidChristian Murck, head of the American Chamber of Commerce in
Beijing.

“In reaction to a vote in the House, they will not be able
to move forward on that front because it will be seen to be
giving into foreign pressure,” Murck said.

Forcing China to raise the value of its currency may create
500,000 jobs in the U.S., most in manufacturing at above-average
wages, according to C. Fred Bergsten, director of the Peterson
Institute for International Economics in Washington. China’s
currency, which is undervalued by as much as 25 percent, is the
most important trade issue facing the U.S., he said in testimony
last week.

Treasury Secretary Timothy F. Geithner said the U.S. isn’t satisfied with the pace of yuan
gains and is considering ways to urge China to let the currency
rise faster.

“The pace of appreciation has been too slow and the extent
of appreciation too limited,” Geithner said in testimony
prepared for a congressional hearing today. “We are examining
the important question of what mix of tools, those available to
the United States and multilateral approaches, might help
encourage the Chinese authorities to move more quickly.”

Geithner’s comments, his strongest since he took office in
January 2009, highlight growing frustration among American
officials with policies they say put American companies at a
competitive disadvantage. The U.S. yesterday filed a pair of
complaints against its second-largest trading partner with the
World Trade Organization, and lawmakers facing elections in
November are introducing measures allowing companies to pursue
sanctions against China for its currency stance.

“The Treasury secretary looks like he is turning up the
volume on his request for action from Chinese monetary
officials,” said Chris Rupkey, chief financial economist at
Bank of Tokyo Mitsubishi UFJ Ltd. in New York. “Politics in
Washington is playing a role as Congress is looking for progress
ahead of the midterm elections.”

Yuan Outlook

The yuan headed for a sixth daily gain against the dollar
today, trading at 6.7333 as of 11:18 a.m. in Shanghai, compared
with the 6.83 peg authorities maintained from July 2008 to June
2010 to shield Chinese exporters from the global crisis. Non-
deliverable forwards indicate China will limit its appreciation
to 1.2 percent over the next 12 months.

Geithner renewed calls on countries with trade surpluses,
such as Japan and Germany, to increase domestic demand and rely
less on exports. While he didn’t refer to Japan’s decision to
intervene in the currency market yesterday, the subject may come
up today after House Ways and Means Committee Chairman Sander Levin called the move “deeply disturbing.”

The secretary is slated to testify twice today, before the
Senate Banking Committee and Levin’s panel.

“Heavy intervention” keeps the yuan undervalued, even
after China’s June decision to drop a peg to the dollar,
according to the U.S. Treasury chief.

Geithner, 49, said the Obama administration would step up
its efforts to urge the Chinese to loosen restrictions on the
currency that make the nation’s exports cheaper in overseas
markets.

Currency Report

“We are examining the important question of what mix of
tools, those available to the United States and multilateral
approaches, might help encourage the Chinese authorities to move
more quickly,” he said. These include the Treasury’s semiannual
foreign exchange report, due to Congress next month, Geithner
said.

In June, the U.S. stopped short of branding China a
currency manipulator in a report that was originally due in
April. Such a designation could lead to sanctions against China.

China, which surpassed Japan as the world’s second-largest
economy last quarter, ran up a $119 billion trade deficit with
the U.S. in the first half of 2010, putting it on a course to
exceed last year’s total of $227 billion. It is also the biggest
foreign investor in U.S. Treasury securities, with holdings of
$843.7 billion in June.

China on June 19 announced that it would allow greater
flexibility in its exchange rate, which Geithner called a “very
important step.” Since then, the currency, also known as the
renminbi, has advanced 1 percent against the dollar, he said.

‘Right to Be Frustrated’

“The United States is right to be frustrated with the rate
of appreciation and the way that the renminbi has not
appreciated since June,” said Edwin Truman, a senior fellow at
the Peterson Institute for International Economics in Washington
and a former Geithner adviser.

China may be using its exchange rate to handle the
aftermath of the global crisis in ways that could help the U.S.,
said Stephen Roach, chairman of Morgan Stanley Asia, in an e-
mail. He said China is moving cautiously while doing its “fair
share” of righting lopsided global trade and investment flows.

“In a fragile post-crisis era, there is nothing wrong with
China relying on a currency anchor as a linchpin of financial
stability,” Roach said. “As much as Washington politicians
would want China to help the U.S. devalue its way back into
economic prosperity, that approach is bound to fail in an era of
huge budget deficits.”

Economic Rebalancing

Geithner said China’s currency stance has created a “major
distortion” in the global economy that is having a “negative
impact” on the U.S. He said appreciation of the yuan would help
with economic rebalancing, while not erasing the U.S. trade
deficit with China.

He called on China to adjust its exchange rate and make a
slate of other structural reforms to policies on interest rates,
energy prices and service-sector investment. Geithner pledged
the U.S. would “aggressively” pursue trade remedies, such as
yesterday’s WTO complaints on electronic payment services and
steel exports.

Geithner also said the U.S. is committed to “restoring
fiscal sustainability” and reining in its long-term budgetdeficits.

Japan’s Intervention

Paul Krugman, a Nobel-prize winning Princeton University
economist, has said China’s currency practices helped push the
yen to rise to this week’s 15-year high against the dollar,
prompting Japan to intervene unilaterally to weaken its currency
on Sept. 15 for the first time since 2004.

Truman said Japan might be able to avoid the need for such
actions by joining the U.S. efforts to persuade the Chinese to
allow the yuan to appreciate.

In a hearing yesterday, Representative Tim Ryan, an Ohio
Democrat and co-sponsor of legislation letting companies seek
duties on Chinese imports, said China is violating trade laws
and the bill would give the U.S. tools to combat undervalued
currencies.

“It’s now time for our country to have the guts to stand
up and take a strong stand against China’s currency
manipulation,” Ryan said in testimony to the House Ways and
Means Committee.

China’s yuan on Sept. 15 rose to the highest level since
1993 against the dollar on speculation the central bank will
allow faster appreciation as inflation accelerates and foreign
pressure mounts. The People’s Bank of China fixed the yuan’s
reference rate at a record high before the U.S. House Ways and
Means Committee convened two days of hearings to discuss the
Asian nation’s currency policy.

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